U.S. insurers are buying corporate pension plans at a record clip as rising interest rates and all-time high stock-market values give companies the perfect excuse to offload them.
Calculating they can make more money from selling companies an annuity to cover the cost of the pension plans and then invest the proceeds in bonds and other securities, insurers are competing to persuade corporate America to sell them their pension risk.
These deals, known as pension risk transfers, have been around for at least 90 years, but they can be limited by a Catch 22: in good times, corporate leaders feel less of a need to rid their companies of pension burdens, and in bad times it is more expensive to do so.
"There's a huge opportunity for the insurance industry," said Ellen Kleinstuber, who advises pension-plan sponsors as an actuary for CBIZ.
Last week, Prudential Financial, the biggest player in pension transfers, said it had finalized $2.2 billion in pension deals during the fourth quarter, including a $1.8 billion deal with United Technologies.
Other large insurers, including Transamerica Life Insurance and Principal Financial are also competing for hefty pension deals as smaller insurers jockey for a slice of the market.
With so much competition, many pension consultants expect 2017 to be a strong year for pension deals. Pension transfers totaling $8.1 billion were finalized in the first nine months of 2016, according to the Life Insurance and Market Research Association (LIMRA), an industry trade group. The number of deals hit 225, the highest in more than 25 years.
"It's really unstoppable now," said Scott McDermott, a managing director at Goldman Sachs Asset Management who advises companies on pension issues.
Pension transfers have been kicking around the insurance industry since the Cleveland Public Library unloaded its pension to Prudential in 1928.
Prudential is still making payments to two of those employees, ages 100 and 103, a spokesman said.
The biggest driver of the trend in recent years is the growing number of companies that are deciding to end their plans, McDermott said.
As retirees live longer and the legal and financial cost of maintaining pensions rise, corporations are keen to jettison them.
The problem for companies looking to offload is that the pension plans must be fully-funded before they can sell them. GM, for example, had to inject more than $2.8 billion into its pension before closing a 2012 transfer to Prudential. It also paid Prudential a $2.1 billion fee for taking on the assets.
GM's current U.S. pension plan that is still held by the company is underfunded by $7.2 billion.
Surging stock markets and rising interest rates are making it easier for companies to replenish their pension plans but there are still gaps. The average corporate pension fund was 82 percent funded as of Jan. 31, according to Mercer Investment Consulting.
Correction: This story as revised to correct that Mercer's report said the average corporate pension fund was 82 percent funded as of Jan. 31.